Energy policy

Efficiency drive

Cutting carbon is appallingly complex as well as costly

ALTHOUGH Britain's energy companies are no longer nationalised industries, they are still, to some extent, arms of the Treasury. When the government decides on a way to make Britain greener—such as joining the European emissions-trading scheme, which puts a price on carbon, or the renewables obligation, which subsidises wind, biomass and solar power, or levies to pay for carbon sequestration and storage or renewable heating—utilities pay for it and pass the costs on to their customers. As such policies grow in ambition, so does the bill to consumers.

On July 27th, as part of its new “annual energy statement”, the Department of Energy and Climate Change put some numbers to this effect. Green policies will raise domestic gas prices in 2020 by 18% and electricity prices by 33%, it said. For nondomestic users the impact will be greater—24% and 43% respectively—and other estimates put the figures higher still.

For residential consumers, the department says, this will matter little. Since government policies to improve domestic energy efficiency, set up smart meters and so on will reduce demand, bills should end up more or less the same—if, that is, the money-saving policies work perfectly and lots of people go in for them.

But even if energy-saving were to balance out the domestic costs of greener environmental policies, the costs themselves may not be justified, especially if there are simpler ways of achieving the same end. An analysis published this week by Policy Exchange, a think-tank, looks at the price of carbon implicit in a range of policies. It found the price implied by the renewables obligation was almost ten times as great as the price of carbon in the European emissions-trading scheme (see chart). Subsidising microgeneration at home costs even more. Assessing such policies in terms of how much carbon reduction they achieve for each pound spent, these high figures are hard to justify.

Britain's energy policy is not, though, driven entirely by a need to cut emissions. It also seeks to increase massively the amount of energy generated from renewable sources. Though renewable energy is low-carbon, it is not necessarily the cheapest way of hitting targets for reducing carbon emissions. These can also be met by burning less fossil fuel or relying more on—dread word—nuclear power.

The goal prompting Britain's drive to increase its renewables comes from the EU, which believes that power from this source should account for 20% of Europe's energy needs in 2020. Britain has been allocated a target of 15% which, though lower than the European target, is far higher than the status quo. Renewables made up just 2.2% of the British energy mix in 2008; no other European country needs to expand its renewables sector so fast in order to meet its target. Few energy experts, speaking candidly, see such an enormous increase as feasible. All agree that trying to attain it is going to be very costly.

This is in part because Britain's renewable of choice is often offshore wind power. With about a gigawatt of installed capacity, Britain already has more turbines around its coasts than any other country. Opposition to onshore wind has been quite effective. Even if many more windmills are built on land, a policy that will be unpopular in the Conservative countryside, Britain will need an extra gigawatt at sea every year between now and 2020, at a total cost estimated by PricewaterhouseCoopers, an accounting firm, at £33 billion ($51 billion). If companies are to invest so much they have to believe that the subsidies which make such renewable sources profitable, once built, will be there for the long run. That, in turn, requires them to believe that customers will go on paying over the odds. It is not clear they will.